Asda re-ignites price war with £500M investment

By Laurence Gibbons

- Last updated on GMT

Asda has invested £500M in price cuts
Asda has invested £500M in price cuts

Related tags Shore capital Economics Investment Inflation Asda

Asda looks set to re-ignite the price war among the UK retailers by investing £500M in price cuts.

The investment, on top of the original £1bn price investment across five years to the end of 2018, will widen the gap between Asda’s prices and its major competitors. It will also close the gap to the limited assortment discounters, it claimed.

The price cuts are part of Project Renewal, a two year programme within Asda’s five-year strategy to reinforce its value proposition.

The retailer’s boss Andy Clarke said the investment would be part of “radical action”​ to win back customers from the discounters in a food market with no growth.

“Today, from our strong financial position, we are taking another bold step forward in our five year strategy,”​ he said.

‘Significant savings

“Fundamentally changing how we buy products means we can realise significant savings from our cost base and pass these directly to customers through a rebased pricing model.”

Asda will join forces with European Marketing Distribution (EMD), a European buying alliance made up of 14 national buying structures and pools the collective buying power of 250 supermarket chains, the retailer confirmed.

“Joining forces with the huge EMD network of 250 European supermarkets will give us significant economies of scale,”​ Clarke said. “We’ll continue to work with our suppliers to lower costs in our supply chain and return sales to growth in partnership.”

About EDM

  • Present in 15 European countries
  • Headquarters located in Pfäffikon, Switzerland
  • Potential turnover of 178 billion euro
  • Md Philippe Gruyters is responsible for pooling the interests of renowned retail companies from all over Europe and coordinating them to common benefit

“But we are not complacent.  We remain cautious and, as the chancellor ​[George Osborne] warned on Thursday, we expect that 2016 will be another year of intense pressure at a macro-economic level in addition to sales remaining under strain from price deflation, a continued competitive background throughout the sector and radically changing customer shopping habits.” 

Clarke described Asda’s trading performance as reaching a ‘nadir’, which market analyst Shore Capital said implied that current same store trade had improved from -4.5% endured in quarter three of 2015.

Better Christmas trading

“Whilst we are unlikely to see a Christmas trading update, we expect Asda's like-for-like  sales over the festive period to have tickled better to say -3.0 to 3.5%,”​ Shore Capital analysts Clive Black and Darren Shirley said.

Shore Capital praised Asda for not sitting on its hands during tough market conditions.

“As we covered last year, the group has through its Project Renewal programme focused down further on efficiency, corporate priorities and delivery,”​ Black and Shirley said.

“Much 'nice to have' has been cut out and the business is firmly looking at how it can fund a necessary narrowing of the price gap with the limited assortment discounters, which it states needs to be circa 5% in order to be more competitive; it is probably circa 10-15% at present.”

Clarke was not alone in his battle to narrow the price with the discounters, Shore Capital claimed.

Sainsbury’s boss Mike Coupe spoke of the need to “further bare down on the differential”​ with the discounters in November.

The City analyst predicted “Messrs”​ Tesco boss Dave Lewis and Morrisons ceo David Potts to be working away on this front too.

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